Inequality Matters, pt.3

Wrapping up this conversation on inequality (see part 1 and part 2), there is still plenty of opportunity to further clarify the economics behind wealth distribution. There are several issues that deserve attention, which only strengthen the argument for more equitable wealth distribution in the US.

How a financial crisis works

The Right likes to make the claim that "wealth distribution leads to economic bubbles." While this is emotionally resonant, this doesn't have much real-world support. Anyone is welcome to review the history of financial crises if they disagree.

What you'll notice in all of these cases is that a financial crisis is generally driven by speculation and twisted market psychology. The primary actors in all of these situations are unscrupulous bankers and executives who spur on financial speculation completely disassociated with economic reality, often committing fraud at the same time. Once their little back room poker game collapsed, economic chaos inside.

Don't worry, these scumbags routinely came out of the situation OK. It was everyone else who had to suffer.

A more equitable country is a stronger country

Of course, there is a limit to my argument about income redistribution. The statistic cited in the previous post, about how lower income people spend more than upper income people, only concern spending levels occurring after specific and focused tax breaks designed to stimulate the economy (in this instance, the stimulus of 2008). What would be truly damning is an assessment of US economic growth and marginal tax rates, with data that shows that at higher top marginal tax rates, GDP suffers.

Unfortunately, you won't find data supporting that argument either. In fact, you'll find just the opposite. There is no correlation between increased tax rates and GDP growth, and there is an inverse relationship between GDP growth and tax rates for the top 1/10 of earners.

Income tax rate vs GDP and receipts

I'll admit that the first case has limitations, and that a universal 90 percent tax rate would be disastrous. But the US has never seen anything like this, nor is anyone asking for it. All I want is a tax distribution similar to the one we had before 1980.

Top margin income tax rate vs GDP

All other things equal, the United States was economically stronger during periods where high tax rates for the very top margin prevented the accumulation of wealth. The revenues from that top margin were spent on infrastructure, schools and the like. The greatest public works project in world history, the development of the interstate system, began in 1956, at the height of 90 percent taxes for the top margin (remember, this doesn't mean that people earning 500k have to pay 450k in taxes; it just means that all money earned over a certain limit, say 400k, is taxed that way; there's still plenty of incentive to get super rich, even in this harsh of a system).

This kind of spending, by the way, benefits the poor more than the rich, creating low-income jobs and providing for the kind of community development (through schools) that the rich don't need.

The stimulus myth

The only strong correlation identified in the previous article was between GDP growth and total tax revenue.

This leads to an obvious conclusion: if you are concerned about short term deficits during an economic slump, the first order of business is to spend enough money to get people back to work and economic growth back on track. This kind of spending, not surprisingly, would benefit the poor over the rich, by making sure that the poor people who lost their jobs got back to work.

This never happened. Fiscal stimulus didn't "fail" as the right would like us to believe; it was simply never tried.

The Obama stimulus package was way too small to begin with, and it was offset by decreases in government spending at the state and local level. Germany, for example, paid to keep almost everyone employed and ended up spending much more money during the crisis than the US.

Not surprisingly, their economy is now leaving ours in the dust, growing at a rate of 9 percent annually.

At the same time, government employment rates are dropping at a scary rate. This will only put more people on the dole and make matters worse.

And while many people, have expressed concern about taking on too much public debt to restore the economy, it is important to keep in mind that this is not the highest debt level our country has faced.

Moreover, most of the current short-term debt countries around the world face is coming from lost revenues due to the downturn and paying for the newly unemployed masses.

A truly fiscally responsible government, and that includes one that addresses the increasing cost of health care in the US (which, um, the Democrats just did), will be able to pay these short-term debts down. And they will do this by eliminating massive tax breaks for the wealthy and restoring a tax system that I have been arguing for throughout.

Behind the wizard's curtain

In Wisconsin, need I remind everyone, thousands of public workers face benefit cuts and the destruction of their unions. In Washington, major programs like financial regulation, food stamps, the new health care bill and education face cuts. Entire government agencies, like the EPA, face defunding, which would lead to thousands of government workers losing their jobs.

Both situations are tragic examples of the politics of austerity. Both are the results of political games brought on fiscal crises that didn't exist. In Wisconsin, the budget crisis is the result of tax breaks to businesses that eliminated a pre-existing budget surplus. In Washington, Congressional Republicans insisted on granting 75 billion dollars in tax breaks to people earning more than 250k a year (from the original Economist article). With this gap in place, they've decided to cut the budget by 61 billion dollars.

Sadly, these won't even accomplish much. Having gutted most of the government, many people will lose their jobs. Economic recovery, the only thing that will eventually lead to increased tax revenues, will be further away. We'll end up playing this same game again in a couple years, with the backdrop of an even worse economic situation.

This is why inequality and an inefficient up tax system matter. Not renewing the Bush-era tax cuts would have given government more lee-way to improve the economy and not force through cuts that will harm middle class Americans. The writing is all over the wall. Police officers are getting fired, schools are closing, teachers are being forced out, and the budget cuts just keep coming. This isn't fiscal responsibility. It's economic warfare by other means, and average Americans are consistently the victims. Fixing this trend is more than possible, and it starts by acknowledging that growing inequality is at the root of most of these problems.

Inequality Matters, pt. 2

Continuing the theme of the previous post, let's not forget the fact that giving money to poor people is actually good for the economy. In fact, it's much better for the economy than giving the same money to rich people. The Economist's Democracy in America blog recently published this chart from the CBO. 

Although a little number heavy, it shows that when poor people get a dollar, they tend to spend $1.28 (poor Americans are funny like that, spending more than what they have). When a rich person gets a dollar, just over three quarters of it gets spent.

What happens to the rest of the money? Here things get a little more complicated. There's no guarantee that money saved by the wealthy will go towards useful business investment. CDO's, for example, don't really fuel much business growth, since they're mostly bets on other securities. The market for them in 2006 was 2 trillion dollars. Stocks and bonds bought in secondary markets don't directly help businesses either, since the money is moved from one investor to another. It's usually people like Goldman making all the real money. Almost all stock trading through formal exchanges are considered "secondary" exchanges.

And if money saved goes to a business, there's no guarantee that it will be spent on real investment. Companies are currently sitting on 1 trillion dollars in cash, and they have little plans to hire. On the other hand, these same companies are seeing record profits. Reducing unemployment is not their concern, nor should it be.

There's a balance to be struck. For all of the hysteria surrounding the debate over wealth redistribution, no one (other than a few on the Right oddly) ever mentions a communist-style universal equality (although most communist societies, in particular China, and incredibily inequal, but whatever). Extreme inequality ruins people's incentives to work hard just as effectively as extreme equality. Mother Jones' set of charts talks about the income distribution that Americans consider reasonable, and it's clear that a system where 10 percent of the people own 90 percent of the wealth is not what they want.

When the economics are sound, real data supports the theory and it follows the confirmed desires of the American people, there is little room to argue against having more redistribution of income.

Inequality Matters, pt. 1

Mother Jones, true to it's modus operandi, has a series of charts addressing income inequality. In case you didn't know already, this blog loves charts (Mother Jones only one some days). While they're all great, this chart stands out.

The second chart is probably stronger. While the share of after-tax income for the top 20 percent has climbed steadily since 1979, it's declined for everyone else. It's important to point out that this is a dynamic view of inequality, not incomes of middle class people per se, although they've been declining over the last ten years too. Instead, see it as the wealthy's income forming an ever greater share of the economy, the rate at which inequality is growing. It's growing fast.

There's a big challenge when discussing these issues in the US, especially with those on the Right that are wedded to the current economic and political regime. Many Americans see income inequality as the result of hard-work and education, making something like this seem more natural. They would see measures to limit income inequality as an assault on the incentives to build businesses and grow the economy as a whole.

They're wrong. And they're wrong for the very arguments that they provide: income inequality reduces the incentives for people to try and succeed. Why should people try hard or be entrepreneurial in the current economy? You have at least a one in ten chance of being unemployed, and if you've got a job, you're salary probably isn't too far from a extremely disappointing 31k a year. Your benefits suck, and you have no hope of it getting any better. Why, indeed, would anyone work hard?

Tyler Cowen argues that most of America's success came from the fact that average, uneducated people could be very successful. You see this all the time when you look at the Great Depression. It's remarkable how many powerful people on Wall Street and abroad had nothing more than a high school education. Even this was rare, since only 6.4 percent of Americans at that time even completed high school.

Now, even a law degree (and 200k in debt) isn't even much of a guarantee you'll land a decent job.  The whole result of the de-unionization de-regulation of the US economy has been to make it almost impossible for regular Americans to succeed. Not surprisingly, America now has one of the lowest levels of intergenerational economic ability in the world. In simpler terms, the American dream is dying: people born rich stay rich, people born poor stay poor, and the gap between them grows wider every day.

Oh yeah, and what are those economically mobile countries out there, rewarding hard work with higher economic status? They're those socialist hell-holes France, Germany, Sweden, Canada, Finland, Norway, and Denmark. Funny how that works, isn't it?

Nominal Numbers Make No F***ing Sense!

I'm begging you all, please, please, please, stop using nominal numbers when you are talking about economic data over time. They are meaningless and only serve to stir up emotions. Thomas is the latest culprit (sorry bud), writing "I also believe that on average each American home receives $17,000 worth of entitlements." What does this number mean, what is it comparable to?

I'm pretty sure that when most on the Right think about entitlement spending, they think of something like this (my data comes from here http://bit.ly/geAhBE):

But these are nominal numbers. They value of a dollar in 2008 is different than the value of a dollar in 2001, which makes a direct comparison impossible. On the other hand, you can make direct comparisons as a percentage of GPD. What do you get?

Entitlements haven't really increase at all in 10 years, other than a spike in 2009 because GDP actually decreased. So can someone tell me where exactly this great entitlement problem is, demanding we cut the hell out of social security?

People worried about immediate spending and tax levels deserve some recognition. Taxes are at their lowest, and spending is at its highest, for the first time since 1945, which, by the way, was the last time we faced an economic downturn this serious. (I apologize for the tiny font, a better version of the table can be found here http://bit.ly/ibAiUq)

But this is just more evidence that we need to fix our economy (and run elevated spending levels like in the 40s) before worrying about anything else.